THE MOST DIRECT ROUTE by which labour productivity affects living standards is through gains in real wages, that is, wages adjusted for the cost of living. Yet median real wages have stagnated in Canada since 1980 despite significant productivity gains. The 2006 Census found that median real earnings of individuals working full-time on a full-year basis barely increased between 1980 and 2005. Over the same period, labour productivity rose 37.4 per cent. If median real earnings had grown at the same rate as labour productivity, the median Canadian full-time full-year worker would have earned $56,826 in 2005, considerably more than the actual $41,401(2005 dollars). The objective of this article is to explain this large divergence between median real wage growth and labour productivity growth.
This article is divided into five sections. The first section sets out the analytical framework used in the article and discusses measurement issues. The second section reviews trends in real wages and labour productivity. The third section provides an accounting reconciliation of the gap between between the growth rate of median real earnings and labour productivity in Canada between 1980 and 2005. The fourth section discusses the drivers of this gap. The fifth section concludes.
Analytical Framework and Measurement
At the aggregate level, when defined consistently, long-term growth in average real wages is determined by labour productivity growth. This relationship is mediated by changes in labour's share of income and labour's terms of trade (the price of the output produced by workers relative to their cost of living):
1)[DELTA]Real Wage = [DELTA]Labour Productivity + [DELTA]Labour's Shares + [DELTA]Labour's Terms of Trade
where [DELTA] indicates a percentage change. In equation (1) real wages are nominal wages deflated using the Consumer Price Index (CPI). (2) In this equation, real wages are an average rather than a median measure, and therefore do not directly capture the effect of changing earnings inequality, an issue to which we will return below.
The key measurement issue in the relationship between labour productivity and real wages is the appropriate choice of a measure of wages. The theoretical relationship between real wages and labour productivity set out in equation (1) is a relationship between the total compensation paid to labour and labour productivity. A number of wage measures covering different groups and based on different definitions of wages are available from Statistics Canada (Table 1). This choice is important, because the series grow at different rates, and using series that are not comprenhensive tends to underestimate growth in labour compensation.
Wage estimates from the Survey of Employment, Payroll and Hours and the Major Wage Settlements series do not cover all workers, nor do they cover all types of labour compensation. While wage estimates from the Survey of Labour and Income Dynamics and Labour Force Survey cover all types of workers, they do not include supplementary labour income. The "wages, salaries, and supplementary labour income" series from the national accounts does cover all forms of labour compensation, but excludes the self-employed. The labour compensation series from the Canadian Productivity Accounts is the most appropriate series to use in analyzing the relationship between real wages and labour productivity. This series covers the broadest definition of compensation and the broadest definition of workers, including the labour component of self-employed remuneration, and i s the measure used for real wages throughout this article. (3)
An important trend has been the growing share of supplementary labour income (SLI) in total labour income. Statistics Canada defines SLI to include employer contributions to pension plans (private or public), supplementary health benefits, Employment Insurance (EI) and workers' compensation. Since 1961, SLI has risen from 4.9 per cent of labour income to 12.9 per cent in 2007 (Chart 1). This increasing importance is attributable primarily to (1) a significant increase in contribution rates for the Canada and Quebec Pension Plans, particularly since 1998, and (2) the increasing importance of welfare benefits such as private health and dental benefits plans, which represented 3.0 per cent of labour income in 2005, up from only 1.0 per cent in 1961. (4) All other components of SLI also increased in importance over the 1961-2005 period: private pensions (2.4 to 3.8 per cent); Employment Insurance contributions (0.7 to 1.5 per cent); retiring allowances (0.0 to 0.7 per cent); and workers' compensation payments (0.8 to 1.3 per cent). Any estimate of the growth in wages which does not include SLI is likely to be an underestimate.
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Trends in Labour Productivity and Real Wages
Over the 1961-2007 period, growth in real wages (1.67 per cent per year) has been slightly slower than labour productivity growth (1.73 per cent per year) (Table 2 and Chart 2). The real wage gap, that is, the difference between the real wage growth and labour productivity growth reflects trends in the labour's share of income and labour's terms of trade. Labour's share fell 0.17 per cent per year between 1961 and 2007, from 57.5 per cent of GDP to 53.1 per cent (Table 2 and Chart 3). Over the same period, labour's terms of trade improved by 0.11 per cent per year. In sum, growth in real wages lagged growth in labour productivity over the period 1961-2007 because the labour share declined. The real wage gap would have been even greater had it not been for an improvement in labour's terms of trade.
In all sub-periods between 1961 and 2007 the labour share fell. The decline was most pronounced in the period from 1989 to …